Tuesday, August 21, 2012

A Deep Dive into China's Central bank Liquidiuty Operations (It's all about our friend the pig)

Ft Alphaville is all over this story.
First up:PBoC ramps up liquidity operations

The People’s Bank of China helped Asian stocks rally on Tuesday with a reported record liquidity injection via reverse repos. From Bloomberg:

The People’s Bank of China conducted 220 billion yuan
($34.6 billion) of reverse-repurchase operations, the most in a single
day, according to a trader at a primary dealer required to bid at the
auctions. The government may introduce new policies to boost consumers’
borrowing and spending this year, the Economic Information Daily
reported today, citing an unidentified person.

We’ve written a lot about Chinese liquidity and how the PBoC is changing its approach to managing it in recent months, as foreign inflows dry up and the shadow banking system shows signs of strain. Yes, the PBoC has plenty of other tools, but they are not infinite....MORE

And:China’s unprecedented liquidity injection

As we noted earlier,
the People’s Bank of China is continuing to inject huge sums of
liquidity into the monetary system via so-called “reverse repos” (the
equivalent of conventional central bank repos elsewhere). According to
Chinascope, the latest round of easing supplied a record Rmb200bn to the
market in exchange for collateral.

The seven-day operation was priced at 3.40 per cent (Rmb150bn) while the 14-day operation was priced at 3.60 per cent (Rmb70bn).

The curious thing, however, is that even the unprecedented scale of
the liquidity injection wasn’t enough to budge repo rates significantly.
The seven-day repo rate was hardly affected, while the 14-day remained
totally unchanged....MORE

The Central Bank is holding off on more inflationary measures such as a reserve ratio cut until they get a handle on food prices. If it weren't for food the Chinese CPI would probably have already gone from disinflation to outright deflation.
From the Hong Kong Standard:Rising pork prices set to push China inflation higher

Inflation in the mainland will edge higher in the
last quarter of the year as domestic food prices, especially pork
prices, increase, an economist said today.
Sun Mingchun, the head of China research and chief regional economist at
Daiwa, said historical data suggests that the overall CPI is driven
mainly by the food price cycle. For example, the CPI reached a peak of 8.7 percent year on year in February 2008, when food prices surged by 23.3 percent on year.
But he forecast inflation for the year will average 2.8 percent. He expects inflation in the third quarter to remain low....MORE

Finally, from Finance Asia:Understanding China's mysterious CPI basketWhat's in the CPI basket and what makes the price change so volatile?

China’s policymakers routinely use the consumer price index (CPI) as an important reference for deciding the country’s monetary policy, but how the index actually works is not readily transparent as the calculation behind the index has never been made public.

Given food’s heavy weighting in household expenditure and in particular
the high per capita meat consumption in China, the nation’s CPI index
is a “meaty pie”, estimated Rabobank International after analysing
public data on food purchases.

It’s no secret that food prices take up a large portion of the CPI
basket in China. During the past decade, food costs for urban households
have accounted for an overwhelming 62% of inflation on average,
according to data from Rabobank.

The food CPI comprises 16 major categories and 262 products, data from
the National Bureau of Statistics show. Although the weightings of
products in the food CPI are not disclosed to the public, the food
expenditure within these categories are published annually.

Based on the official data on food purchase, Rabobank estimated that
meat consumption accounts for 19% of China’s CPI basket, second only to
dining out, which has the largest share of 21%, followed by fruit and
vegetables, which take up 18%. Pork, in turn, accounts for 63% of meat
consumption, followed by chicken, which stands at 20%.

Pork’s significant contribution to China’s CPI is no surprise. In July
2011, when Chinese inflation reached an alarming level of 6.5%, the
Chinese government responded by releasing stocks from its pork reserve
and putting price caps on some edible oils.

Despite the Chinese government’s efforts to control prices, Chinese
consumers are constantly worried about runaway food inflation, largely
due to the volatility of pork prices....MORE